Hiring in China without an Entity: EOR vs FESCO

Summary:

• A foreign company with no Chinese entity cannot directly employ local staff — and a Representative Office is legally barred from hiring Chinese nationals itself, which is the historic reason for the FESCO model.
• FESCO-style agencies traditionally use labour dispatch (劳务派遣), but dispatch is capped at 10% of the workforce and limited to temporary, auxiliary or substitute roles — so it is not a compliant route for core permanent staff.
• A modern Employer of Record (EOR) instead signs a standard, direct labour contract through its own licensed Chinese entity, which fits permanent roles that dispatch cannot.
• Employers must pay the ‘five insurances and one fund’ (五险一金), whose city-specific rates add roughly 27–35% on top of gross, and must put a written contract in place within one month or owe double wages.

Quick answer: A foreign company cannot employ staff in China without a local entity (a WFOE), and a Representative Office may not hire Chinese employees directly — it must use a licensed agency. The traditional FESCO route relies on labour dispatch, which Chinese law caps at 10% of headcount and restricts to temporary, auxiliary or substitute roles, making it unsuitable for permanent hires. An Employer of Record signs a direct labour contract through its own Chinese entity instead, handles the mandatory five insurances and one fund (roughly 27–35% employer cost) and the strict written-contract rules, and lets you hire compliantly without setting up a WFOE.

Not directly. To employ Chinese nationals on your own books you need a local legal entity — typically a Wholly Foreign-Owned Enterprise (WFOE), which takes months to incorporate and carries registered-capital, tax and ongoing-compliance obligations. Critically, a Representative Office (RO) — the lightest foreign presence — is legally prohibited from directly hiring Chinese employees and must engage an authorised human-resources service agency to employ staff on its behalf. That single rule is the historic reason the “FESCO model” exists.

FESCO (the Foreign Enterprise Service Company) and peers such as CIIC and China Star are state-linked HR agencies originally set up to staff foreign ROs. Their classic mechanism is labour dispatch (劳务派遣, láowù pàiqiǎn): the agency is the legal employer and “dispatches” the worker to perform services for your company. The agency holds the labour contract, runs payroll and remits social insurance, while you direct the day-to-day work.

This worked well when foreign companies only had ROs. But after abuse of the model, the law was tightened — and that changes the calculus for anyone relying on dispatch today.

The 2012 amendment to the Labour Contract Law and the 2014 Interim Provisions on Labour Dispatch imposed two hard limits:

• Dispatch workers may not exceed 10% of an employer’s total workforce.
• Dispatch is only permitted for positions that are temporary, auxiliary or substitute (临时性、辅助性、替代性) — “temporary” meaning no more than six months.

Dispatched workers are also entitled to equal pay for equal work versus direct hires. The upshot: pure labour dispatch is a poor legal fit for a permanent, core employee — exactly the kind of hire most foreign companies want to make. Using it for a long-term sales lead or engineer invites a reclassification and compliance risk.

A modern Employer of Record in China avoids the dispatch trap. Rather than dispatching the worker, the EOR‘s own licensed Chinese entity signs a standard, direct labour contract with the employee, becoming the genuine legal employer. That fits permanent roles the dispatch model cannot, while still removing the need for you to set up a WFOE. In short:

• FESCO / dispatch: agency dispatches the worker; constrained by the 10% cap and the temporary/auxiliary/substitute rule; designed around ROs.
• EOR: provider’s entity employs the worker directly on a normal labour contract; suited to permanent hires; carries full employer compliance.

Either way you keep no Chinese entity of your own — but only the direct-contract EOR route is appropriate for ongoing, full-time positions.

Every employer in China must enrol employees in mandatory social insurance plus the housing fund, collectively the “five insurances and one fund”:

• Pension — employer ~16%, employee 8%.
• Medical — employer ~9–10%, employee ~2%.
• Unemployment — typically ~0.5% each.
• Work-related injury — employer only, ~0.16–0.8% by industry risk.
• Maternity — employer only (now merged into the medical fund in most cities).
• Housing provident fund — employer and employee each 5–12%, set locally.

Rates, the contribution base and the housing-fund percentage are set city by city, not nationally, and the base is bounded by a local floor and ceiling (commonly 60% to 300% of the prior-year local average wage). As a planning rule, total employer contributions add roughly 27–35% on top of gross in tier-1 cities such as Shanghai and Beijing. Always price the specific city of employment rather than a national average.

IIT on employment income is progressive on annual comprehensive income, from 3% to 45%, after a standard deduction of RMB 60,000/year (RMB 5,000/month) plus special additional deductions (children’s education, housing, elderly care, etc.). The employer withholds IIT monthly on a cumulative basis. The preferential tax-exempt benefits-in-kind available to foreign (non-domiciled) employees — housing, children’s schooling, language training and similar — have been extended through 31 December 2027, so qualifying expats can still elect them instead of the special additional deductions.

China’s Labour Contract Law is strict and employee-protective:

• A written labour contract must be signed within one month of the start date. Miss it and the employer owes double wages for each month worked without one (from month two up to month twelve); after a full year with no written contract, an open-ended contract is deemed to exist.
• An open-ended (non-fixed-term) contract must be offered after two consecutive fixed-term contracts, or after ten years of continuous service.
• Probation is tied to contract length — e.g. up to 2 months for a 1–3 year contract, max 6 months for contracts of three years or more — and probation pay must be at least 80% of the full wage.
• Severance (economic compensation) on most terminations is one month’s pay per year of service; for high earners the monthly figure is capped at three times the local average wage and the count at twelve years.
• There is no at-will employment — termination requires a statutory ground and process.

• Working hours: standard 40-hour, five-day week; overtime is regulated and capped, with premium pay.
• Annual leave: statutory 5 days after 1 year of total service, 10 days after 10 years, 15 days after 20 years (many employers offer more).
• 13th-month salary: customary (often a “Chinese New Year” bonus) but not legally mandatory unless written into the contract.
• Public holidays: seven national holiday periods, with makeup working days around the longer breaks.

If you are building a substantial, long-term China operation, a WFOE gives you full control. For one hire or a small team, setting up and maintaining an entity rarely makes sense — and the FESCO/dispatch route is legally constrained for permanent staff. An EOR that employs through a direct labour contract lets you onboard compliantly in weeks, with the five insurances and one fund, IIT withholding, written-contract timing and termination rules all handled. If you already operate a WFOE, our China payroll service runs the monthly cycle, social-insurance filings and IIT. Talk to our China team to choose between an EOR and your own entity.